Hindalco in talks to refinance Novelis' $5.3-billion loans

To help company cut finance costs

Aditya Birla Group firm Hindalco has initiated talks with banks to refinance loans worth $5.3 billion taken by its subsidiary Novelis. According to bankers, the loans are being refinanced with longer-term loans and at lower costs to cut the finance costs of the company and increase its repayment schedule.

Hindalco had acquired Novelis in 2007 in an all-cash deal at an enterprise valuation of $6 billion. But, the commodity cycle turned against the company as low demand and high finance costs ate into its profits.

Bankers said one of Novelis loans worth $3.5 billion is due early next year and the company has initiated talks to refinance this loan and the interest rates would be close to 25 basis points than the previous loan, said a banker.

This will be one of the largest refinancing of loans by an Indian company after Tata Steel refinanced its loans worth $5.4 billion in 2014. The loans were taken for the acquisition of Corus. India's largest private sector company, Reliance Industries, taps the overseas markets periodically to reduce its high-cost loans with low interest ones.

The refinancing is important for Hindalco as the acquisition resulted in its consolidated debt rising to Rs 68,467 crore and its finance costs shooting up to record high of Rs 4,178 crore as of FY15 (see chart).

Falling metals prices also impacted its share price, which fell by half early this year. It is around Rs 96 a share as on Wednesday.

When contacted, a Hindalco spokesperson declined to comment on its refinancing plans.

While Hindalco was impacted by low aluminium prices, Novelis - which sells can sheets, foils, and auto-body sheets as a downstream processor - passes on the raw material costs to its customers. As of now, 65 per cent of Hindalco's revenues are coming from Novelis even as in India, Hindalco ramps up its production from its two new facilities in Madhya Pradesh and in Odisha.

Hindalco is not alone in getting impacted by falling aluminium prices. The aluminium cost curve since 2007 to till date shows a sharp fall in profits of all upstream players. The gap between London Metal Exchange (LME) aluminium price and the average cost of production has been reduced to zero. Of late, it has turned negative. Thus, on a base of 50 million tonnes of annual aluminium production, the fall in LME prices has wiped out an aggregate earnings before interest, taxes, depreciation and amortisation of $45 billion over the years, according to a March 22 report by Credit Suisse.